Does Paying Off Your Car Loan Lower Your Insurance Costs?

Paying off your car loan is an exciting milestone You’ve finally reached the end of monthly auto loan payments and now officially own your vehicle outright. But does eliminating your car loan also lower your auto insurance premium?

Unfortunately, paying off your car loan does not directly reduce your car insurance costs Auto insurance rates are based on factors like your driving record, location, age, gender, and more – not your loan status

However, there are some potential opportunities to lower your insurance costs after paying off your car that we’ll explore in this article. Keep reading to learn more.

How Car Insurance Rates Are Calculated

First, it’s helpful to understand what goes into calculating your car insurance premium. Insurance companies use complex algorithms that weigh several criteria to estimate your risk level as a driver. The higher your risk, the more you’ll pay for coverage.

Here are some of the most significant factors that affect your auto insurance rates:

• Driving record—Your premiums are directly affected by the accidents, traffic tickets, and claims you’ve had in the past. Drivers with infractions pay higher rates.

• Location – Where you live and park your vehicle matters. Cities and neighborhoods with a lot of crime are charged more.

• Mileage – Drivers who rack up more miles have increased accident risk exposure. Low mileage is rewarded with lower premiums.

• Vehicle – Insuring an expensive luxury or sports car that’s costly to repair means a higher insurance rate.

• Age – Teen drivers pay the highest premiums. With more experience behind the wheel, rates start going down around age 25.

• Gender: Data shows that young male drivers are more likely to be in accidents. So insurance is pricier for men under age 25.

• Credit – In most states, a good credit score means lower premiums. People with poor credit are deemed higher risk.

Owning your vehicle free and clear does not factor into standard auto insurance rate calculations. Your loan or lien status is not considered a risk variable by insurers.

So even after making your final car payment, your premiums remain based on the risk profile factors above that stay the same.

Removing Lienholder Status from Your Policy

Just because paying off your auto loan doesn’t directly reduce your car insurance costs doesn’t mean there aren’t opportunities for savings after becoming lien-free.

Here are two important steps to take regarding your insurance policy after paying off your car:

Inform Your Insurer

The first thing you should do is notify your car insurance company that you’ve paid off your vehicle loan and no longer have a lienholder.

When you originally purchased your policy, the lender financing your auto loan was listed on your policy as the lienholder. This gave them a secured interest in your car.

If the vehicle got totaled, the insurer would pay your lienholder first from the claim settlement to satisfy the unpaid loan balance. Then any remaining funds would go to you.

Now that your car is fully paid off, call your insurance provider to remove the lienholder status from your policy. Failing to do this could result in major delays receiving a future claim payout that rightfully belongs to you.

Re-Evaluate Your Coverages

Next, take a fresh look at your policy coverages and make any beneficial changes now permitted without a lienholder.

Lenders usually impose minimum insurance requirements for financed vehicles like:

• Liability limits meeting state minimums
• Comprehensive and collision coverage
• Maximum deductibles of $500 or $1,000

These stipulations ensure the lienholder’s interest in your car is protected if you total it or are at-fault in an accident.

But once you have the title free and clear, you gain more freedom over your policy beyond what the lender dictated.

For example, you can opt to:

• Increase deductibles to $2,500 or $5,000 to lower premiums
• Drop comprehensive and collision if your car is older or you can afford repairs
• Reduce liability limits if state minimums are now sufficient for your situation
• Remove any unnecessary add-on coverages like rental reimbursement

Carefully weighing these options with your insurance agent and making prudent changes could potentially slice 10-20% off your premiums.

When Maintaining Full Coverage Still Makes Sense

Just because you legally can remove comprehensive and collision coverage after paying off your car doesn’t mean it’s automatically the wisest move.

Here are some scenarios where keeping full coverage may be in your best interest financially:

You Have an Expensive Vehicle

If you drive a luxury vehicle, sports car, or late-model truck/SUV worth $20,000+, keeping collision and comprehensive is likely a good call.

You want protection in the event your valuable auto sustains damage from an accident, vandalism, severe weather, fire, or theft. Making an expensive repair or replacing the vehicle altogether could be ruinous without insurance.

You Lack Car Replacement Savings

Let’s say your paid-off car is only worth $5,000-10,000 now. Dropping collision and comprehensive could be tempting since repairs or replacing the older vehicle may seem manageable out-of-pocket if necessary.

But first consider your current financial situation. Do you have ample savings set aside you’re confident won’t be needed for other emergencies? Without those funds, comprehensive and collision coverage provides peace of mind.

You Lease or Finance Another Vehicle

If you don’t own your primary vehicle free and clear, maintaining full coverage on any extra paid-off cars can be prudent.

Why? Because leased or financed vehicles always require you to carry comprehensive and collision. So for simplicity, keeping the same coverages across your whole policy is often the best approach.

You Use Your Car for Business

Vehicles used for commercial purposes like food delivery, ride-share driving, contracting work, etc. necessitate full coverage too. Any accidents or damage impeding your ability to operate the business are risks not worth taking.

You Live in a High-Risk Area

Drivers residing in regions prone to weather events, auto theft, vandalism, and animal collisions may decide the potential hazards outweigh eliminating collision and comprehensive just to save some money on premiums.

The Takeaway

Paying off your auto loan is an accomplishment to be proud of and provides more control over your insurance policy. But it doesn’t directly lower your car insurance costs since premiums are based on risk factors like driving history and age, not loan status.

However, you can potentially achieve savings after becoming lien-free by:

• Removing the lienholder from your policy
• Raising deductibles
• Dropping unnecessary coverages
• Evaluating the need for comprehensive and collision based on your car’s value and finances

Be sure to discuss any policy changes with your insurer to ensure you still have adequate protection. Paying off your car loan can offer an opportunity to optimize insurance spending without leaving yourself exposed.